NPS Scheme for informal sector workers

Concept

The article examines critical reforms in NPS Lite aimed at including the informal sector in the National Pension Scheme. This is significant as workers in this sector typically lack access to benefits like provident funds or gratuity.

National Pension System-Lite (NPS-Lite)

• Launched by the Pension Fund Regulatory and Development Authority (PFRDA) in 2010.
• Aims to secure the financial future of economically disadvantaged individuals.
• Operates on a Group Servicing Model, where “Aggregators” represent low-income groups for tasks such as registration, contributions, and account maintenance.
• Open to individuals aged 18 to 60.

For more details on pension schemes in India, refer to the comparison between the Old Pension Scheme and the New Pension Scheme.

Challenges

• The informal sector’s diversity makes implementing a universal pension solution challenging.
• Workers have varying saving capacities, complicating their inclusion in pension schemes.
• Standard annuity plans may not be suitable for informal sector workers.
• Lower life expectancy in this sector could lead to unfair subsidies, benefiting those who live longer.

Reforms Needed

Utilizing Existing Infrastructure

• Use the current NPS infrastructure, including central record-keeping, licensed fund managers, the NPS Trust, and PFRDA regulation.
• Allow Union and state governments to integrate new pension schemes within the NPS framework, avoiding the creation of separate welfare funds.
• Ensure portability of pension accounts across states.
• Enable governments to provide co-contributions to encourage enrollment and manage pension savings transparently.
• Develop a framework to facilitate state governments’ integration with the NPS ecosystem.

Reforming Drawdowns

• Address annuity issues by developing accurate life tables reflecting mortality rates in the informal sector.
• Extend the proposed Systematic Lump Sum Withdrawal facility to informal sector workers. This facility allows subscribers to withdraw up to 60% of their pension savings in phased intervals—monthly, quarterly, half-yearly, or annually—until age 75.

Why Atal Pension Yojana (APY) is Less Suitable Compared to NPS-Lite

Reasons Explanation

• Capped Contributions: Limits the amount workers can invest, preventing them from saving more for a higher pension.
• Low Pension Amount: Results in a relatively low pension, insufficient for financial security in retirement.
• Lack of Flexibility: Does not accommodate variable contributions, which is essential for workers with irregular incomes.
• Guaranteed but Limited Returns: Limited returns fail to account for inflation or rising living costs, leading to inadequate support.
• No Investment Choices: Does not offer various investment options, missing potential higher returns for workers.
• Inadequate for Diverse Needs: One-size-fits-all approach does not cater to the diverse financial needs and capabilities of workers.
• Encourages Low Savings: Capped contributions and pensions indirectly discourage higher savings.
• Comparatively Less Attractive: Less appealing compared to schemes like NPS-Lite that offer higher potential returns and flexibility.
• Potential for Greater Economic Disparity: Low returns may widen the economic gap between informal and formal sector retirees.
• Limited Appeal: Rigid structure and limited benefits might not attract enough informal sector workers to participate.

Recent Government Initiatives Aimed at Supporting the Informal Sector

• Pradhan Mantri Kisan Samman Nidhi: Provides annual financial assistance to small and marginal farmers.
• PM SVAnidhi: A micro-credit program offering financial support to street vendors.
• E-Shram Portal: An online platform for informal sector workers to access social security benefits.
• Labour Codes: Unified labour laws designed to enhance workers’ rights and protections.
• Pradhan Mantri Shram Yogi Maan-dhan: A pension scheme for unorganised sector workers aged 60 and above.
• World Bank Support: Financial and technical assistance to improve conditions for informal sector workers in India.

Pension Fund Regulatory and Development Authority (PFRDA)

• Statutory Foundation: Established under the PFRDA Act of 2014.
• Mission: Ensure old age income security through the establishment, development, and regulation of pension funds.
• Oversight: Operates under the Ministry of Finance.
• Headquarters: New Delhi.
• Structure: Led by a Chairperson, with up to six members, including at least three Whole-Time Members, appointed by the Central Government.
  

  Key Functions:

  • Oversees the NPS and other applicable pension schemes.
  • Establishes and develops pension funds.
  • Safeguards the interests of pension fund subscribers.
  • Registers and regulates intermediaries involved in pension funds.
  • Sets standards for managing pension fund corpus.
  • Provides a mechanism for addressing subscriber complaints.
  • Resolves disputes between intermediaries and subscribers.
  • Educates the public and trains intermediaries on pension and retirement savings.
  • Conducts inquiries, investigations, and audits related to pension funds and their intermediaries.